Abica Roast Coffee Company produces Columbian coffee in batches of 6,200 pounds.

Question

Abica Roast Coffee Company produces Columbian coffee in batches of 6,200 pounds. The standard quantity of materials required in the process is 6,200 pounds, which cost $4.00 per pound. Columbian coffee can be sold without further processing for $9.40 per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for $11.00 per pound. The processing into Decaf Columbian requires additional processing costs of $10,250 per batch. The additional processing will also cause a 6% loss of product due to evaporation.

a. Prepare a differential analysis dated August 28, 2014, on whether to sell regular Columbian (Alternative 1) or process further into Decaf Columbian (Alternative 2).

Differential Analysis

Sell Regular Columbian (Alt. 1) or Process Further into Decaf Columbian (Alt. 2)

August 28, 2014

Sell Regular Columbian (Alternative 1)

Process Further into Decaf Columbian (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues

$  

$  

$  

Costs

  

  

  

Income (Loss)

$  

$  

$  

Differential Analysis

Sell Regular Columbian (Alt. 1) or Process Further into Decaf Columbian (Alt. 2)

August 28, 2014

Sell Regular Columbian (Alternative 1)

Process Further into Decaf Columbian (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues

$  

$  

$  

Costs

  

  

  

Income (Loss)

$  

$  

$  

Explanation / Answer

a. Differential analysis Sell regular columbian Process further into decaf columbian Differential effect on net income Revenues 58280 64108 5828 (6200*9.40) (6200-6%)*11 Costs 24800 35050 -10250 (6200*4) (6200*4)+10250 Income (loss) 33480 29058 -4422 Columbian coffee should not be processed further,since it will result in loss of $4422 b. Increase in loss due to further processing=$4422 Columbian coffee sold in pounds=6200-(6200*6%)=5828 Incrase in selling price required to make net advantage or disadvantageis 0=4422/5828=0.76 Selling price after further processing should be=11+0.76=11.76 Differential analysis Sell regular columbian Process further into decaf columbian Differential effect on net income Revenues 58280 68537.28 10257.28 (6200*9.40) (6200-6%)*11.76 Costs 24800 35050 -10250 (6200*4) (6200*4)+10250 Income (loss) 33480 33487.28 7.28 Difference of $7.28 is due to round off

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